Franchise Law Developments from Around the Globe
Belgium's proposed franchise law (the "Proposed Law") seemed to be headed for final adoption on October 18, 2005; however, the Belgian Senate had other ideas. The Senate took up the bill for reconsideration prior to the October 18th deadline, so the bill is now back in a state of limbo while the Senate debates whether to make changes to the draft that was approved by the Belgian Chamber of Representatives on July 7, 2005. The Belgian Senate has 60 days to decide whether revisions need to be made to the Proposed Law. If the Senate revises the Proposed Law then the bill will be sent back to the Belgian Chamber of Representatives for further consideration.
According to sources at Fedis, the Belgian Federation of Distributors, the Senate has two primary objectives in reconsidering the bill. First and foremost, the Senate will likely revise the bill's effective date. When the bill was approved by the Chamber of Representatives in June 2005 it was anticipated that the bill would be formally adopted on September 1, 2005, so the current draft of the bill stipulates that the law would enter into force on September 1, 2005. The Senate will likely push back the effective date in order to avoid retroactive application of the law. In addition to amending the bill's effective date, some members of the Senate hope to expand the bill to regulate certain aspects of the contractual relationship between parties to commercial partnership agreements; however, sources at Fedis have indicated that most members of the Senate would likely reject an attempt to expand the scope of the law to regulate the terms of contracts between parties. Sources at Fedis anticipate that the Proposed Law will likely be adopted and become effective sometime in 2006.
The Proposed Law, if granted final approval as drafted, would require franchisors to deliver pre-sale disclosure to prospective franchisees containing prescribed information including, among other things, a history and experience of the franchisor; franchisor's financial statements for the previous three years; the mode of calculating remunerations to be paid under the agreement; the duration of the agreement; the terms and conditions for renewal; circumstances under which the agreement may be terminated; exclusive rights granted under the agreement; non-competition restrictions (including duration and conditions of those restrictions); franchisee's obligations and consequences of failing to fulfill those obligations; appearance of the store or other business to be operated under the agreement; the number of franchisees participating in the system; and the franchisor's market share. According to the current draft of the bill, such disclosure must be provided to the franchisee at least one month before the agreement is executed.
Because the Proposed Law has not yet been formally adopted there is no official English version available; however the full text of the Proposed Law is available in French and Dutch at www.lachambre.be.
In September of 2005 it was announced that the Greek government has commissioned the drafting of a new franchise law in Greece. The proposed law is still a work in progress, so few details are available at this time about the precise language or requirements that will be included in the proposed law. However, the drafters have indicated that they are looking to the recently adopted Italian franchise law for guidance, and the proposed law will almost certainly contain pre-contractual disclosure requirements. The drafters have also indicated that they are considering the experience of Spanish franchise regulations, so the Greek law may also include a registration requirement for franchisors similar to the Spanish franchisor registry. It is anticipated that the first draft of the proposed law will be ready sometime in the next one to two years, but the draft is still in its early stages so it is difficult to predict if and when the law might become effective.
The Ontario government recently adopted changes to the Regulation to Ontario's franchise law, the Arthur Wishart Act (the "Act"). Those changes went into effect on July 1, 2005.
Prior to July 1, 2005, the Act allowed large, sophisticated, judgment-free franchisors to apply for an exemption from the requirement to attach the franchisor's financial statements to its disclosure document. The exemption was not very attractive because meeting the applicable criteria to qualify for the exemption was only the first step. Franchisors were then faced with a cumbersome application process that involved, among other things, entering into an indemnity agreement with the Ontario government.
Under the revisions to the Regulation the unwieldy application process has been replaced with a streamlined Regulation under Subsection 13(2) of the Act, which states that franchisors do not have to apply to the government to obtain the exemption. The revised Regulation provides for a self-declaratory process in which franchisors confirm for themselves whether they meet the exemption criteria. If so, the franchisor should include a statement in its disclosure document to that effect.
The exemption criteria did not change significantly under the revised Regulation; however, legislators did make one franchisor-friendly change by allowing franchisors to qualify for the exemption if they have remained free of judgments, orders or awards relating to fraud, unfair, deceptive practices or laws regulating franchises for at least five years (instead of ten years as prescribed in the old Regulation).
The Ontario government also revised the Regulation to make disclosure less complicated for foreign franchisors required to attach financial statements to their Ontario disclosure documents. Prior to July 1, 2005, the literal wording of the Regulation permitted only statements prepared in accordance with Canadian standards. Effective July 1, 2005, the Regulation permits audited financial statements that are prepared in accordance with generally accepted standards that "...are at least equivalent to..." those set out in the Canadian Institute of Chartered Accountants Handbook. This change should allow U.S. franchisors, and potentially other foreign franchisors, entering the Canadian market to use the financial statements prepared according to their home country's accounting standards (as long as those standards are at least equivalent to Canadian standards).
The text of the revised Regulation can be accessed at:
Over the years there have been many unsuccessful attempts by members of Sweden's parliament to propose legislation protecting franchisees in Sweden. For example, a government study two decades ago resulted in a legislative proposal that would have required franchisors to negotiate with the employees of every franchisee before changing their franchise system. Thankfully, this unworkable proposal was soundly rejected.
However, members of Sweden's parliament have continued to request a new government study on the need for legislation to protect franchisees. Such requests were repeatedly denied on the grounds that no significant grievances existed (i.e. if it isn't broken, don't fix it) until several years ago, when a clever member of parliament combined the request for such a study with a request to investigate whether Sweden should adopt the model franchise law promulgated by Unidroit. The parliament decided to conduct a government study and appointed an appeals judge as the sole investigator. The stated goals of the study were (1) to analyze Unidroit's Model Law and advise whether such law should be adopted as law in Sweden, and (2) to determine the need to protect franchisees with regard to the terms governing the franchise relationship (e.g. arbitration and termination requirements). The results of the study were published at the end of 2004.
The investigator concluded that there is no need for legislation strengthening the position of franchisees by regulating arbitration and termination provisions in franchise agreements. The investigator reasoned that franchisees are legal entities that should be able to protect themselves in commercial transactions and therefore do not need the protections afforded to everyday consumers.
On the other hand, the investigator did conclude that there is a legitimate need for pre-contractual information to be provided to prospective franchisees. While the survey established that the majority of franchisees had received adequate information before signing their franchise agreements, most franchisees were of the opinion that the franchisor's duty to disclose should be required by law.
However, the investigator did not recommend adoption of Unidroit's model law - instead he proposed the amendment of an existing Swedish law governing contractual terms between legal entities to require franchisors to provide adequate and relevant information to prospective franchisees within a reasonable time before execution of a franchise agreement. The investigator's proposal clearly recommends enacting franchise disclosure requirements, but it raises several questions which will need to be answered before enacting such requirements, including, among others, (1) who is subject to the law, (2) what information should be disclosed, (3) how far in advance should disclosure be given prior to execution of a franchise agreement, and (4) should disclosure be required for a transfer from an existing franchisee to a new franchisee?
The study is now being considered by the relevant government authorities, but the Swedish Franchise Association ("SFA") has already evaluated the study and rejects its proposal. The SFA agrees that franchisors should provide potential franchisees with adequate and relevant disclosure prior to signing an agreement, but the SFA disagrees with the assertion that legislation is needed in light of the fact that up to this point the franchise industry has regulated these issues effectively without significant grievances.
Once the relevant authorities have provided their comments, the Department of Justice will decide whether to propose amendments to the law and present a bill to parliament for consideration, but with upcoming elections drawing the focus of legislators in the next year it is unlikely there will be any movement on a franchise disclosure law within the next twelve months.
Ryan Whitfill is an attorney in the Franchise and Distribution section of Haynes and Boone, LLP, Dallas, Texas. Information used to prepare this article was provided in part by the Belgian Federation of Distributors a.k.a. Fedis (Belgium); Mr. Yanos Gramatidis of Bahas, Gramatidis & Associates (Greece); Cassels Brock & Blackwell LLP (Ontario, Canada); and Mr. Anders Fernlund of Advokatfirman NOVA (Sweden).
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